\ 


LIBRARY 
0 F t n L 

UNIVERSITY  OF  ILLINOIS. 


62d  Congress  \ C1?M  * w f Document 

3d  Session  / SENATE  \ No.  1001 


FARM  CREDITS 


ARTICLE 

BY 

JOHN  R.  DOS  PASSOS 

OF  NEW  YORK 

SUGGESTING  A PLAN  TO  PRO- 
MOTE FARM  CREDITS 


PRESENTED  BY  MR.  CLARKE  OF  ARKANSAS 
January  9,  1913. — Ordered  to  be  printed 


WASHINGTON 

1913 


•Ml 

1W 


f“  Octet  CUOC-  Toovri 


FARM  CREDITS. 


In  1767  when  Prussia  was  in  the  throes  of  great  financial  distress 
B firing,  a merchant  of  Berlin,  laid  before  Frederick  II  a plan  for  a 
credit  association.  He  said: 

The  true  capital  of  this  country  consists  of  cash  and  real  estate.  The  latter  is  more 
than  ten  times  in  excess  of  the  former,  and  if  only  a small  part  of  it  could  be  made 
current,  it  would  be  abundantly  sufficient  to  accrue  credit  and  welfare  for  the  entire 
community. 

The  scheme  of  a credit  foncier,  which  means  loans  on  real  estate,  was 
gradually  adopted  through  the  Continent  and  subsequently  in  France, 
and  in  almost  every  instance  proved  a great  success. 

Upon  the  general  question  of  the  necessity  of  legislation  to  assist 
the  farmers  of  this  country  by  loans  of  money  I can  hardly  speak 
with  moderation.  Since  the  formation  of  our  Government  this  hard 
working  class  has  been  allowed  to  shift  for  itself  and,  by  adopting  a 
sort  of  hand-to-mouth  policy,  the  farmers  have  been  able  to  crawl 
through  life  unaided  by  the  bankers,  banks,  or  the  Government. 
Although  the  sound  and  excellent  systems  of  credit  foncier  and  credit 
agricola  have  been  most  successfully  operated  for  more  than  a century 
in  Germany  and  for  many  years  in  France,  and  although  the  American 
consuls  in  various  cities  of  Europe  long  before  this  matter  was  taken 
up  by  the  present  administration  had  filled  our  State  Department 
with  statistics  and  records  pointing  out  the  advantages  of  these 
institutions  and  recommending  their  adoption  in  the  United  States, 
no  attention  whatever  has  been  paid  to  the  subject  by  either  the 
legislative  or  executive  branches  of  our  Government. 

Fifteen  years  ago,  in  the  spring  of  1897, 1 brought  the  subject  before 
the  public  by  a series  of  printed  articles,  which  were  distributed  more 
or  less  throughout  the  country,  but  the  project  of  a credit  foncier  was 
so  indifferently  received  that  the  gentlemen  whom  I had  interested 
in  it  concluded  to  drop  it.  One  so-called  great  financier,  whose  con- 
ception of  finance  consisted  in  locking  up  money  in  a safe  and  standing 
guard  over  it  with  a revolver  and  triumphantly  reporting  to  his  stock- 
holders that  he  had  the  same  amount  of  dollars  and  cents  in  his  pos- 
session as  the  year  before — this  sage  individual  pronounced  the  credit 
foncier  plan  as  a wildcat  scheme  and  not  to  be  tolerated  by  sound 
financiers  like  himself. 

And  now,  after  15  years,  while  the  scheme  has  slumbered,  comes  His 
Excellency  the  President  of  the  United  States,  in  carefully  revised 
speeches,  based  upon  the  same  kind  of  reports  of  special  consular 
agents,  and  with  great,  good  judgment  advocates  the  speedy  adoption 
of  measures  to  assist  financially  the  farmers  through  credit  foncier  and 
credit  agricola  systems,  so  caustically  criticized  when  I presented  them 
before. 

It  is  well  to  confine  this  talk  to  the  credit  foncier  system.  The  pur- 
pose of  such  an  institution  is  to  take  the  income-paying  farms  and 

S.  Doc.  1001,  62-3  3 


4 


FARM  CREDITS. 


other  real  estate,  urban  and  suburban,  and  make  them  a basis  of  credit 
by  issuing  against  them  at  a low  rate  o£  interest  bonds  which  should  be 
negotiated  with  the  same  ease  as  a Government  bond  or  bank  notes. 
The  processes  this:  A farmer  or  real  estate  owner  wishes  a loan  on 
his  property,  which,  after  examination,  the  institution  is  ready  to 
make.  Say,  the  loan  is  $10,000.  The  credit  foncier  hands  to  the 
borrower  either  $10,000  in  cash  or  $10,000  in  its  bonds,  bearing,  say, 
4 per  cent  interest.  These  bonds  the  company  is  privileged  to  issue 
against  every  loan  it  makes,  and  they  should  be  split  up  into  small 
amounts,  as  low  as  $10  each.  Then  they  are  easily  negotiable.  As  a 
matter  of  practice  the  association  generally  gives  the  borrower  the 
cash,  but  in  the  commencement  of  its  business  it  might  deem  it 
advisable  to  issue  its  bonds  so  as  to  accustom  the  general  public  in 
their  use. 

To  make  the  matter  even  more  clear,  suppose  there  were  a con- 
centrated single  loan  of  $20,000,000  against  certain  pieces  of  urban 
and  suburban  real  estate.  The  Credit  Foncier  pays  this  money  to 
the  mortgagors  and  then  issues  against  the  loan  thousands  of  bonds 
of  $10,  bearing  4 per  cent  interest,  which  it  sells  just  as  it  would 
Government  or  railroad  bonds.  Instead  of  1,000  individuals  loan- 
ing this  $20,000,000  there  would  only  be  one — the  Credit  Foncier — 
and  the  persons  who  were  seeking  mortgage  investments  would 
buy  these  bonds.  Back  of  these  bonds  is  the  real  estate  and  the 
capital  of  the  Credit  Foncier  or  mortgage  bank.  The  existing  mort- 
gage indebtedness  on  farms  is  assumed  to  be  about  $6,000,000,000, 
which  is  being  carried  at  between  8 and  9 per  cent  interest.  The 
funding  of  this  vast  indebtedness  at  a rate  of  interest  of  about  $4.65 
per  annum  and  making  the  principal  payable  in  75  years  is  a task 
of  itself  which  would  occupy  the  company  organized  for  such  a pur- 
pose without  regard  to  other  business,  and  would  save  to  the  farmers 
millions  upon  millions  of  dollars  of  interest.  The  effect  of  funding 
this  debt  would  be  to  put  into  circulation  a large  amount  of  money 
which  is  now  locked  up  in  these  mortgages,  and  which  is  practically 
dead.  To  put  this  vast  fund  afloat  would  help  lenders  and  borrowers 
alike.  The  inequality  existing  in  respect  to  their  power  to  borrow 
money  between  the  farmer  on  the  one  side  and  those  engaged  in 
financial  or  mercantile  pursuits  on  the  other  is  vivid  and  striking. 
Almost  every  avenue  is  closed  to  the  farmer.  The  doors  of  all  the 
national  banks  are  shut  upon  him.  They  are  properly  prohibited 
from  loaning  money  on  real  estate.  They  receive  money  on  deposit 
payable  on  demand,  and  their  assets  must  be  liquid  and  capable  of 
instant  conversion  into  cash.  A Credit  Foncier  system  is  quite  dif- 
ferent from  the  ordinary  one  of  deposit  banks. 

Now,  the  history  of  legislation  of  this  country,  instead  of  exhibit- 
ing a desire  to  aid  and  facilitate  the  agriculturist,  has  been  absolutely 
indifferent  to  him  and  his  interests.  The  money  lenders  and  the 
money  interests  are  all  centered  in  the  large  cities,  and  the  farmer 
has  not  been  able  to  borrow  with  any  ease  either  on  his  land  or  crop, 
but  has  frequently  been  compelled  to  sacrifice  his  products  and  land 
to  his  existing  financial  need  and  necessity.  It  is  essential  that  every 
one  should  have  a clear  knowledge  of  the  workings  of  the  Credit  Fon- 
cier system.  In  the  course  of  time  it  loans  millions  upon  millions  of 
dollars  upon  urban  and  suburban  property.  Where  does  it  get  the 
money  ? Apart  from  a good-sized  paid-up  capital  it  should  have  the 


FARM  CREDITS. 


5 


power  against  each  loan  to  issue  its  bonds  and  sell  them,  so  that  it  can 
go  ahead  making  loans  until  the  limit  of  its  capital  and  borrowing 
capacity  is  reached. 

Much  has  been  written  and  talked  about  the  subject  since  Presi- 
dent Taft  recently  opened  it  to  the  people  of  the  United  States,  but 
no  tangible  scheme  has  been  put  forward  by  which  to  crystallize  the 
thoughts  into  legislative  form. 

I now  am  glad  to  throw  out  these  suggestions,  not  as  final  or 
definite,  but  to  call  forth  proper  discussion.  First,  let  me  explain 
the  principle  of  amortization.  The  amortization  or  sinking  fund  is 
simply  this:  That  the  borrower  is  never  called  upon,  unless  it  be 
agreeable  to  him,  to  pay  the  principal  of  his  loan  as  a whole,  at  any 
one  time,  but  by  paying  a small  sum  each  year,  in  addition  to  his 
interest,  he  establishes  a fund  which  ultimately  wipes  out  the  princi- 
pal and  satisfies  the  debt. 

The  mechanism  of  the  annuity  benefit  can  easily  be  understood. 
At  the  end  of  each  year  his  portion  of  the  annuity  is  applied  to  the 
amortization  or  sinking  fund,  reducing  the  original  debt  to  the  same 
amount,  the  interest  decreasing  in  the  same  proportion  as  the  debt. 
But  as  the  annuity  remains  always  the  same,  the  result  is  that  the 
fraction  of  the  annuity  necessary  to  the  payment  of  interest,  while 
decreasing,  leaves  a large  sum  applicable  to  the  amortization  or 
repayment  of  the  capital  and  the  progression,  slow  in  the  beginning, 
increases  from  year  to  year  and  acquires  great  rapidity  when  nearing 
the  limit  of  the  fixed  period.  This  may  be  called  the  salient  and 
vital  principle  of  the  plan. 

Let  me  illustrate:  An  individual  wishes  to  borrow,  say,  $100  on 
real  estate  on  the  75-year  plan.  The  company  will  lend  him  the 
money  at  about  $4.65  per  annum.  Add  to  this  sinking  fund  to 
repay  loan,  $0.28;  expense  fund,  $0.25;  extra  reserve  fund  for  con- 
tingent losses,  $0.32;  annuity  or  total  annual  costs,  $5.50. 

Now  observe,  that  if  the  company  make  no  losses  a loan  for  75 
years,  through  the  workings  of  the  32  cents  extra  reserve  above 
explained,  will  be  completely  amortized  or  fully  paid  off  in  less  than 
55  years.  At  any  rate,  this  32  cents  of  the  annual  extra  reserve, 
constitutes  an  adequate  fund  against  all  possible  loss.  This  extra 
reserve  fund  is  a new  feature,  but  will  prove  a powerful  element 
of  security  for  the  company.  It  makes  every  borrower  a most  inter- 
ested party  in  protecting  the  company  against  error  and  overvaluation 
of  properties  offered  as  security,  because  if  it  suffers  no  losses,  he  will 
receive  his  full  share  of  this  large  reserve  fund.  This  system  has 
existed  in  France  since  1852,  with  a most  unexampled  success.  The 
Credit  Foncier  has  paid  yearly  dividends,  taken  from  profits  each 
year,  and  in  addition  has  set  aside  an  enormous  surplus  reserve  to  the 


I.  Name  of  Company. 


The  Loan  & Mortgage  Co.  of  the  United  States,  to  be  incorporated 
by  special  act  of  Congress,  the  incorporators  named  in  the  act  to 
represent  every  State  in  the  Union  and  to  elect  the  first  board  of 
directors. 


6 


FARM  CREDITS. 


II.  Capital  Stock. 

The  authorized  capital  stock  of  the  company  to  be  $200,000,000. 
When  $30,000,000  are  subscribed  and  paid  in,  the  company  shall  be 
authorized  to  commence  business  and  to  call  in  the  balance  of  its 
capital  from  time  to  time  as  shall  be  determined  by  the  board  of  direc- 
tors, but  this  could  not  probably  be  accomplished  under  five  years. 
The  whole  capital  is  a guaranty  fund  for  all  the  company’s  business; 
but  one  quarter  of  the  existing  capital  to  be  held  as  a special  reserve 
and  the  remaining  75  per  cent  of  the  capital  could  be  used  in  com- 
mercial and  other  financial  operations  and  in  loaning  money  upon 
imperishable  products  to  farmers  through  local  banks  of  the  Raif- 
feisen type. 

The  investment  of  the  capital  and  the  granting  of  its  mortgage 
loans  should  be  exercised  with  the  same  prudence  as  life  insurance 
companies  manifest  in  the  handling  of  their  immense  reserve  funds 
and  the  selection  of  their  policy  holders,  but  it  must  be  understood 
that  the  main  source  of  the  profits  of  the  company  will  be  found  in  the 
development  of  its  mortgage  loan  and  bond  operations.  The  public 
should  be  asked  to  subscribe  for  this  capital  stock.  The  denomina- 
tions of  the  shares  of  the  company  to  be  $20  or  even  $10  each,  no  one 
person  being  allowed  to  subscribe  for  more  than  2,000  shares. 

III.  Offices  of  the  Company. 

The  headquarters  of  the  company  should  be  in  Washington,  D.  C., 
branches  to  be  established  in  the  capitals  of  every  State,  and  sub- 
agencies in  other  principal  cities  thereof;  the  object  being  to  give  to 
farmers  and  other  borrowers  in  cities  and  counties  not  actually  enjoy- 
ing proper  banking  and  borrowing  f acdities  the  same  advantages  to 
borrow  money  at  a low  rate  of  interest  which  are  enjoyed  by  bankers, 
borrowers,  and  merchants  living  in  money  centers. 

The  provision  of  25  cents  of  the  annuity  would  constitute  an  ample 
sum  for  the  expenses  of  the  organization. 

IV.  Supervision  of  Company’s  Affairs  by  Government. 

The  President  of  the  United  States,  or  the  Secretary  of  the  Treas- 
ury, or  the  directors  of  the  company,  whichever  may  be  determined 
upon,  to  appoint  the  governor  or  president  of  the  company;  also 
two  directors  and  an  auditor,  whose  duty  it  should  be  to  publish 
monthly  detailed  reports  of  the  business  of  the  company,  under  oath; 
their  salaries  to  be  paid  by  the  Government.  The  introduction  of  the 
Government’s  supervision  adds  stability  to  the  company  and  is  of  the 
character  which  the  Comptroller  of  the  Currency  and  his  examiners 
exercise  over  the  national  banks.  In  addition  to  this,  the  officers  of 
the  company  might  be  compelled  to  make  sworn  reports  in  detail 
and  publish  them  every  month,  under  the  supervision  of  the  Comp- 
troller of  the  Currency,  who  should,  of  course,  exercise  visitatorial 
powers. 


"«r-  *.  mam****- 


FARM  CREDITS. 


7 


V.  Benefits  of  the  Credit  Foncier  Plan. 

1.  It  enables  the  farmers  and  other  borrowers  of  money  on  real 
estate  to  obtain  it  easily  and  at  a low  rate  of  interest  either  for  a long 
or  short  term,  at  rates  not  onerous,  and  permits  them  to  pay  off  the 
loan  when  they  are  ready  or  leave  it  to  remain  until  it  is  paid  off  by 
the  small  sumf  which  they  contribute  each  year  to  the  amortization  or 
sinking  fund. 

2.  The  immediate  effect  of  introducing  this  system  will  be  to  en- 
hance the  value  of  farm  lands  by  causing  the  withdrawal  from  the 
market  of  such  good  farms  as  are  now  subject  to  foreclosure  for 
inability  to  meet  the  principal  and  making  borrowing  upon  good 
country  or  city  real  estate  as  practicable  and  easy  as  the  borrowing 
of  money  upon  negotiable  securities  or  personal  property.  When  a 
mortgagee  can  transmute  his  loan  into  bonds  which  pass  from  hand  to 
hand,  what  an  impetus  will  be  given  to  all  kinds  of  real  estate  trans- 
actions. 

3.  It  will  enable  the  farmer  or  producer  of  imperishable  products  to 
borrow  money  upon  them  at  a low  rate  of  interest,  until  such  time  as 
he  is  ready  to  sell  them. 

Money  for  this  purpose  could  be  furnished  in  the  first  place  by 
local  banks  of  Raiffeisen  species,  or  mutual  association  companies, 

■ and  these  small  banks  could  in  turn  discount  loans  made  to  the 

■ farmers  at  the  Credit  Foncier. 

There  is  no  doubt  that  each  year  the  farmer  is  subjected  to  the 
■caprices  and  speculations  of  a large  class  of  operators  in  cereals  and 
■other  land  products,  who  take  advantage  of  his  known  condition  to 
‘wrest  his  products  from  him  at  rates  which  do  not  always  represent 
the  actual  and  inherent  value  of  the  same. 

4.  By  the  establishment  of  this  company,  and  through  the  issue  of 
its  numerous  bonds,  of  easy  negotiable  denominations,  it  may  be  said 
that  they  will  be  soon  accepted  as  safe  and  commodious  instru- 
ments of  exchange,  where  and  when  currency  is  lacking,  thus  prac- 
tically adding  largely  to  the  circulating  medium  of  this  country. 

5.  It  will  confer  upon  those  sections  which  now  are  suffering  from 
the  lack  of  borrowing  or  banking  facilities  the  same  use  of  money  as 
is  enjoyed  by  the  most  favored  communities. 

6.  It  will  have  the  effect  of  equalizing,  for  borrowing  purposes, 
the  value  of  property  in  all  sections  of  the  country  and  enable  the 
owner  of  real  estate  in  Tennessee  or  Arkansas  of  a fixed  and  certain 
value  and  income  to  borrow  the  same  amount  of  money  thereon  at 
the  same  rate  of  interest  that  he  could  on  property  of  equal  value  in 
other  States. 

7.  As  a consequence  of  the  establishment  of  a low  rate  of  interest 
by  this  company,  a large  amount  of  capital  which  is  now  reserved  for 
high  rates  of  interest  will  be  forced  into  the  market  and  add  to  the 
facility  of  borrowers  of  money  everywhere. 

8.  The  establishment  of  this  system  in  this  country  will  necessarily 
have  an  effect  upon  the  habits  and  business  methods  of  the  farmers 
by  making  them  prudent  and  economic  in  the  management  of  their 
farms  to  conform  to  the  conditions  and  regulations  of  the  company 
relating  to  loans,  both  before  and  after  they  are  made,  and  by 

f interesting  them  as  stockholders,  bondholders,  or  borrowers  of  the 
K company. 


8 FARM  credits 3 0112  061589229 

9.  Finally,  here  is  a plan  perfectly  nonpartisan  in  its  character  an 
scope,  to  the  support  of  which  all  parties  can  rally. 

it  immediately  creates  an  equalization  and  stability  of  real  estat 
values  hitherto  unknown  by  enabling  its  owners  everywhere  to  borro- 
upon  it  with  the  same  facility  as  upon  personal  property.  It  creates 
low  and  uniform  rate  of  interest,  it  instills  into  the  veins  of  a suffering 
financial  body  new  blood  and  health,  it  starts  the  volume  of  mone 
from  congested  centers  and  causes  it  to  flow  into  new  channels. 

John  R.  Dos  Passos. 

New  York,  December , 1912. 


